How do We Prevent a Depression? Let’s See What History Says…

President Obama’s defenders and detractors look at the same economic data but come to entirely different conclusions. Obama defenders say things would have been worse — Obama detractors say things should have gotten much better by now.

Obama defenders contend that but for his heroic measures in combating the economic crisis America would have been plunged into another Great Depression.

Obama detractors contend that those same measures are thwarting a sustainable recovery and setting America up for an even more painful Day of Reckoning.

Other nations have had more reason to fear inflation than has America. Germany, for example, had hyperinflation in the 1920s, which made their money virtually worthless and brought the nation to its knees. America has also experienced hyperinflation, such as with the “continental” currency during the Revolutionary War. But since the 1930s, the big economic fear in America has been depression. Americans think depressions must be avoided at all costs because our experience with the Great Depression teaches us that a depression can be intractable.

Nevertheless, Obama takes his cue for dealing with the meltdown from FDR. It’s the Keynesian template for how to handle a down economy, which consists of massive government intervention. The Keynesian cure includes deficit spending, jobs programs, and expanded government aid to the unemployed. Hence, our trillion-dollar deficits, shovel-ready stimulus jobs, and “99ers,” folks who have received unemployment benefits for 99 weeks and are soon to be bumped off the program. Obama’s programs are FDR’s on steroids. Obama assures us that “only government” can cure what ails the American economy. Otherwise, we risk sinking into depression.

We shouldn’t be so spooked by the spectre of looming depression. After all, we think of recessions as being necessary, even cleansing. Recessions are part of the business cycle. They’re corrections. We need them to get the economy back on an even keel. Perhaps if government dealt with them differently, sharp downturns that threaten depression could also be cleansing and corrective.